Tuesday, October 13, 2020

Time in the market beats timing the market

"The idea that a bell rings to signal when investors should get into or out of the market is simply not credible. After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently."  Jack Bogle

We all know that timing the market is so difficult to make it worthwhile, that it is essentially not worth doing. A lot of brainpower goes into market timing, but it always comes back with worse results over a long period of time.

I wanted to illustrate the futility of timing the markets by a simple calculation I made.

I assumed that there were three separate investors, each of them starting in January 1980. Every investor has $100 to invest every month. They keep investing $100 per month from January 1980 to September 2020.

The first investor is great at timing, and always buys at the bottom of the month. This means that this investor is able to correctly predict the lows for the month for 40 years.

The second investor is unlucky at timing, and always ends up buying at the highest price for the month. This investor is so unlucky, that he always buys at the worst time of the month.

The third investor simply puts $100 to work at the end of each month, like clockwork.

So how do they do in the end?

The first investor ends up with 648,103.85

The unlucky investor ends up with 611,372.16

The investor who just buys regularly every month, ends up with 628,047.32. I think that this is the most realistic scenario.

The chart below shows no visible difference between the three investors.

I have crunched the numbers before for Johnson & Johnson, and I have come up with a similar conclusion. While you may be able to get an edge in a perfect situation, it is not large enough to warrant trying to time the markets, especially given the high failure rates. Therefore, it is best to identify a process, and stick to it on a repeatable basis. If you manage to buy regularly, on a predictable schedule, you will do better than most investors due to discipline and good behavior.

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